Tuesday, June 25, 2019, 12:31 PM, EST
- NASDAQ Composite -0.69% Dow -0.12% S&P 500 -0.33% Russell 2000 +0.12%
- NASDAQ Advancers: 1131 / Decliners: 1245
- Today's Volume (vs. Monday) -3.75%
- Crude $58.10 +$0.20 , Gold $1429.70 +$15.40 , VIX 15.78 +0.52
- Conference Board's Consumer Confidence Index fell to 121.5 in June vs consensus 131.00 - its lowest level since September 2017
- May revised down to 131.3 from 134.1
- May U.S. New Home Sales weaker at 626,000 vs. consensus 684,000
- April revised slightly higher to 679k vs 673k previously reported
- April U.S. Case-Shiller Home Price Index (20-city, M/o/M) 0.0% vs. consensus +0.1%
- April U.S. Case-Shiller Home Price Index (20-city, Y/o/Y) better at +2.54% vs. consensus +2.5%
- U.S. M/o/M Redbook retail sales -2.5% vs -2.4% previously reported
- U.S. Y/o/Y Redbook retail sales +5.0% vs +5.4% previously reported
- April FHFA New Home Sales rise +0.4%, higher than the +2% expected increase
The markets are a little softer today out of the gate following some weaker than expected economic data. All-in-all a continuing theme of consolidation near the highs on lighter than average trading volumes for equities in the U.S. Monday saw the markets close essentially flat to slightly lower. Expectations are still for positive trade headlines from the G20 this weekend when President Trump and China President Xi meet.
Currently, 4 of the 11 S&P 500 sectors are trading higher with Real Estate and Healthcare the leaders. The Communication sector is lower by over 1% and Tech is off by 0.7%. Crude oil trades mixed to flat while gold continues to extend its current run making a new 52 week high today. The dollar is up slightly while the yield on the 10-yr is now below 2% at 1.98%.
M&A continues this week with a mega-deal in the healthcare space. AbbVie (ABBV) will acquire Allergan (AGN) the maker of Botox in a cash and stock deal valued at over $83 billion including debt. Shares of ABBV are down over 13% to start the day while AGN rallies up over 25% on the merger news. YTD, global M&A stands at $2.7 trillion of announced or proposed deals which is down 7.4% from this time last year. In North America, we have seen $1.4 trillion of deals which is down 10.4% from this point last year.
Plenty of Fed Speak today following last week's meeting. Chairman Jerome Powell will speak today at 1:00 pm while Federal Reserve Bank of Atlanta President Raphael Bostic, Federal Reserve Bank of New York President John Williams and Federal Reserve Bank of St. Louis President James Bullard will all be on the talking circuit today. President Trump again laid criticized at the feet of the Federal Reserve last night saying that the Fed "doesn't know what it is doing" and compared the U.S. central bank to a "stubborn child." Expect to Powell stick to his script form last week and to continue to keep with the "appropriate action" theme. The current Fed Fund Futures Rate now stands at a 100% rate cut at their July meeting with a 40% chance of that cut being a half point instead of a quarter basis point.
Trading volumes continue to drift below the yearly average. Monday saw trading volumes on the consolidated tape down by over 11% at 6.4 billion shares vs the 2019 average of 7.2 billion. The volume on the consolidated tape continues to trend lower, despite consolidation near all-time highs. Look for trading volumes to uptick this Friday with the Russell family of indexes annual reconstitution. Expectation are for trading volumes to top 10 billion shares which is in line with last year's rebalance.
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Brian's Technical Take
There is growing chatter about the underperformance of small cap stocks and that being a "canary in the coal mine," or yellow flag, foreshadowing a looming top in the broader equity indices. The general thinking goes small caps are a riskier asset class and thus should outperform when animal spirits are alive and kicking. While this may sometimes hold true, there are plenty of instances where it does not and skeptics may be looking too short term with their analysis.
The recent performance numbers show the large cap S&P 500 (SPX) is currently +17% YTD which yes is outperforming the small cap Russell 2000 (RTY), +13.5%, by a healthy 350 bps margin. And sure enough in 2018 the SPX (-4.4%) outperformed the RTY (-11.1%) by 670 bps. However go back a little further in time to the significant lows that were made in Q1'16 and you will see the RTY gained 84.7% to its September 2018 highs. Over this same period the SPX gained 62.5%. Small caps outperformed by a healthy 2,200 bps and thus the big boys were arguably well overdue for a little catchup.
In fact when factoring in the rebound off the 2018 lows and the recent large cap outperformance in 2019, the SPX now stands +62% from its Q1'16 lows vs. … wait for it … 61.9% for the RTY. How is that for performance parity?
Looking ahead those that are holding strong to the belief that small cap underperformance is a "negative divergence" and reason to be underweight risk may soon find themselves in the FOMO (fear of missing out) camp. Technically speaking large caps simply look better on an absolute and relative basis. In the last week the SPX made new all-time highs while the RTY is 12.5% below.
The largely dormant FX market appears to have woken up this past week which could also favor large caps and plenty of other risk assets. Following last week's dovish FOMC, the US dollar Index (DXY) broke down below key technical support levels in what could be the early stages of a meaningful decline. While one day or week does not make a trend, since mid-March we have repeatedly highlighted the potential "perfect storm" brewing in the EURUSD currency pair and the potential for a strong bullish reversal in the euro. If the weaker dollar scenario plays out for the remainder of 2019, that should bode well for the large cap multi-national corporates which have a greater percentage of exports than their small cap brethren.
The biggest weighting in the RTY is the financial sector (17.5%) which is facing headwinds from the inverted yield curve and looming rate cuts by the Fed which should pressure NII's over the coming quarters. The S&P500's biggest weighting is technology (21.5%) with financials down at the 4th biggest weighting (12.8%). Within a falling rate and flat/inverted yield curve environment, the large cap financials as a whole have a greater diversity of business lines and fee income and are likely to fair better than the small cap financials which typically have greater leverage to rates.
Finally the below ratio of the RTY over SPX plots the relative performance of the two indices on a monthly period going back to 1980. When the numerator (RTY) outperforms, the ratio moves higher and vice versa. During the super cycle bull mark throughout the 1980's and 1990's, the ratio was in a secular downtrend whereby small caps meaningfully underperformed large caps. The ratio peaked in July 1983 and bottomed nearly 16 years later in February 1999. Over this time both groups had phenomenal absolute performance, however large caps outperformed meaningfully.
Circling back to the present, there are certainly no shortage of geopolitical risks across the globe which in theory argues larger cap stocks are at greater risk. Yet recent price action is telling a different story and momentum could keep this trend going. This month the relative strength ratio is starting to break down below clearly defined support to fresh 10-year lows. The monthly MACD went negative in November while the monthly RSI, 36, is in the bear zone.
On a relative basis the breakdown below long term support and bearish momentum readings suggest the recent trend of large cap outperformance could actually kick into a higher gear. As history has shown this alone is not reason to get all "beared up". On an absolute basis both groups can still do well as we saw in the good old days of the 80's and 90's.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.